REC’s Strategic Plan, Part 3 - Financial
The third strategic area of focus identified in REC’s latest strategic plan is financial. The overarching goal is “Meet all financial metrics while providing affordable services.” The action items specific to this area are:
•Implement a 4-year plan to fully allocate fixed and variable costs
•Improve the equity to asset ratio
•Pursue cost savings through internal efficiencies and external opportunities
•Expand Ciello for positive net margin
Both REC and Ciello strive to provide their respective services at the lowest cost possible while maintaining outstanding quality of service. For many decades REC has conducted a cost-of-service study every three years to, as close as possible, fairly and accurately design rates for electric service. Particularly in the past decade, technology has provided methodologies that have improved the ability to allocate fixed and variable costs to all rate classes. Ciello expenses are mostly fixed, so rates for broadband and phone service are a simple rate based on the speed of service.
Every year, REC conducts an audit of financials which includes both the electric and telecommunications businesses. One of the important financial metrics included in the audit is the ratio of equity to asset. REC obtains financing for capital projects from National Rural Utilities Cooperative Finance Corporation (CFC). The equity to asset ratio is also an important metric for accessing financing. In recent years with the startup of Ciello, this ratio, due to the investments in the telecommunication infrastructure has decreased. While still meeting lending and financial requirements, the goal is to increase this ratio.
The fourth action item listed above, “Expand Ciello for positive net margin” is crucial to achieving improvements in this ratio. Ciello had positive margins in July, and while the monthly net margin might bounce in and out of positive numbers, the long-term trend shows Ciello is on track to have a positive margin for the 2023 fiscal year.
Reducing expenses has been an ongoing effort for years. Before Ciello started up, REC had 51 employees. Today REC and Ciello combined have 54 employees. Finding operational efficiencies has meant that for the past six years REC has not had a rate increase even while most price indexes have increased around 10 percent in the past five years. This past year, REC and Ciello entered into an agreement with Enterprise Fleet Management to acquire and maintain many of the vehicles used for both REC and Ciello. This agreement will lower the cost of acquiring and maintaining a large portion of the vehicle fleet.
The final goal in the strategic plan — communication— will be discussed in next month’s column.